You've probably heard ads promising to "settle your tax debt for less." The real program behind those ads is the IRS Offer in Compromise (OIC). It exists, and it does help some taxpayers, but it has strict eligibility rules, and many people are better served by a different option. Here's how it actually works, based on the IRS's own guidance.
What is an Offer in Compromise?
The IRS says an OIC "may allow you to settle your tax debt for less than the full amount you owe if you can't pay in full or doing so would cause financial hardship." (IRS: Offer in compromise)
The key point is in the next sentence of the IRS's guidance:
"Generally, we won't accept an offer if you can pay your tax debt in full through a payment plan and/or equity in assets."
So an OIC isn't a discount for anyone who owes. It's for people whose income, expenses and assets show they realistically can't pay the full amount. The IRS considers your income, expenses and asset equity.
Basic eligibility: the gatekeeping rules
Before the IRS will even consider your offer, it says you must:
- File all required tax returns
- Make required estimated tax payments for the current year
- Not be in an open bankruptcy proceeding
- If you're an employer, make required federal tax deposits for the current quarter and the last two quarters
If you apply and aren't eligible, the IRS says it will return your application and application fee. Any lump-sum or periodic payments you sent will be applied to your tax debt.
Start with the IRS's free Offer in Compromise Pre-Qualifier tool. It checks eligibility and helps prepare a preliminary offer amount.
How the IRS evaluates your offer
The IRS compares what you offer with what it believes it could reasonably collect, based on:
- Income: what you earn now and can expect to earn
- Necessary living expenses: the IRS uses its own allowable expense standards, not just what you actually spend
- Asset equity: for example, home equity, vehicles, bank accounts and retirement funds
The details are in the Form 656-B Offer in Compromise Booklet, which includes the forms and step-by-step instructions. If your equity and future disposable income add up to more than you owe, an offer is unlikely to be accepted, and a payment plan is usually the better route.
What it costs to apply
According to the IRS:
- Every OIC application requires a $205 application fee and a first payment, unless you meet the low-income qualifications. Only individuals can qualify for the low-income exception.
- Lump sum option: pay 20% of your offer amount when you apply. If the offer is accepted, pay the rest in five or fewer payments.
- Periodic payment option: make an initial payment when you apply and keep making payments while the IRS considers your offer. If it's accepted, continue until the offer amount is paid.
- If your offer is rejected, the application fee isn't returned, and your payments are applied to your balance.
What happens while the IRS reviews it
The IRS says that once it confirms eligibility and processes your application:
- It suspends most collection activities
- It extends your collection period
- It may request additional information
- It may file a notice of federal tax lien
You must keep making your required OIC payments during review. You don't have to make payments on an existing payment plan for the same balance.
The IRS also states that your application will be automatically approved if it isn't accepted or rejected within two years of receipt, not counting time in appeal.
If it's accepted, or rejected
If the IRS accepts your offer:
- You must meet all the offer terms in Section 7 of Form 656, including staying compliant with filing and payment going forward.
- Federal tax liens aren't released until the offer is paid in full.
- Some offer information becomes publicly available.
If it's rejected, you can appeal to the IRS Independent Office of Appeals. (IRS: Appeal your rejected offer in compromise)
Who is a good candidate?
Every case is different, but an OIC tends to be worth a closer look when:
- Your income barely covers necessary living expenses under IRS standards
- You have little equity in assets
- Your situation isn't likely to improve soon, for example because of age, health or limited earning capacity
- You're current on filing and estimated payments
It's often not the right fit when you have significant home equity or retirement savings, a high income relative to the debt, or unfiled returns. Common alternatives:
- Installment agreements: the IRS's payment plans page explains the options. (IRS: Payment plans)
- Penalty abatement: this can reduce the balance if you qualify.
- Currently Not Collectible status: for temporary hardship.
California has its own offer program
If you owe the California Franchise Tax Board, the FTB runs a separate OIC program. Key differences the FTB lists:
- FTB offers must be a lump sum (no payment plans).
- They can't include prior payments and can't be zero-dollar offers.
- You must have explored payment options, filed all required returns, and agree with the amount owed.
- The FTB evaluates its offers separately from offers to the IRS, CDTFA or EDD.
- Collection actions don't automatically stop when you apply.
- The FTB generally decides within 4 to 6 months of assignment to a specialist.
Watch out for "settle for less" promises
No one can guarantee the IRS will accept an offer. The IRS makes that decision based on your financial information. Be cautious with anyone who promises a specific result or quotes a settlement amount before reviewing your finances.
How Tax Resolution Plus can help
At Tax Resolution Plus, we run the numbers first. With your authorization, we:
- Pull your IRS records
- Gather your income, expense and asset information
- Calculate what the IRS is likely to consider your ability to pay
- Tell you whether an Offer in Compromise is realistic, or whether a payment plan, penalty relief or hardship status fits better
We work from our office at 2575 McCabe Way, Suite 210, Irvine, CA 92614, and by phone nationwide.
Wondering if you qualify? Book a free consultation or call (866) 900-9001.
This article is general information, not tax or legal advice. Fees and rules change, so check the linked IRS and FTB pages for current details.